humans will still have a comparative advantage in something
At this moment, I think the greatest advantage of humans with low intelligence is that they are relatively flexible, “easy to program”, and come with built-in heuristics for unexpected situations. By which I mean that they can easily walk across your factory or shop; and you don’t have to be a computer programmer to explain them you want them to pick boxes from one place and move them to other places sorting them by color. And in case of fire (which you forgot to mention explicitly during their job training), instead of quietly continuing to move the boxes until everything burns, they would call for help.
Give me reasonably cheap robots with these skills, and I think some people will have no economical comparative advantage left. Getting from there to replacing an average programmer would probably be a shorter distance than getting from zero to there.
I agree with you that automated processes will eventually have an absolute advantage in all areas of productivity. However, humans only need a comparative advantage to be employable. The theory of comparative advantage is a “powerful yet counter-intuitive insight in economics” and I recommend checking it out. Ricardo’s example is especially instructive, link is below.
As an extreme example, today a computer processor can calculate one addition in 1 nanosecond, and one multiplication also in 1 nanosecond. A human can calculate one addition in 10 seconds, and one multiplication in 100 seconds (multiple-digit integers).
Taking the law of comparative advantages too literally, if I have a computer, I should be able to trade with people, offering to multiply integers for them, if they will add integers for me, for a ratio of e.g. 3 multiplications for 1 addition. They should profit, because instead of spending 100 seconds doing one multiplication, they only need to spend 30 seconds doing three additions for me, and then I will do the multiplication for them. I should profit, because instead of wasting 3 nanoseconds for three additions, I only need to spend 1 nanosecond for one multiplication.
But in real life it wouldn’t work for the obvious reasons (transaction costs being a few magnitudes higher than any possible profit).
This is a silly example mostly proving that even the comparative advantages are not guaranteed to save the day. If the difference between robots and humans becomes too large, the costs of having to deal with humans will outweigh the possible gains from trade.
Upon review of all these comments, I was excited to craft a reply. So I started describing the theoretical reasoning and supporting empirical evidence for the theory of comparative advantage and its labor market interpretation. I also researched historical unemployment rates during periods of great technological progress. After a short while, a much more profitable idea dawned on me. Introducing…
Mac’s Unemployment Nightmare Insurance Policy
Worried that technological advances will leave you jobless? Hedge that risk!
Confident that automation will wreak havoc on the economy? Put your money where your mouth is!
For an annual premium that’s just a fraction of your benefit, Mac promises to pay out when the U.S. unemployment rate exceeds 35%.
That’s a whole 10% lower than the worst case scenario in the Quartz video, so what are you waiting for? Call us today! 1-800-MAC-RICH
Hm… why would I buy technological-unemployment insurance? If I’m understanding the theories right, in such a scenario, income/returns to equities should increase markedly. So wouldn’t I be better off taking my premiums and buying stock market indexes? Unlike other scenarios like life insurance (where death could strike at any time and so self-insurance can be a bad idea), everyone seems to agree that there’s not going to be any such spikes within the next, say, 10 years, and that allows for a decent nest-egg to be built up.
Equities are not guaranteed to hedge this risk. Equity total returns are influenced by many factors, including: interest rates, valuation metrics, economic sensitivity, inflation, the tax regime...and on and on. Moreover, tons of research has shown that major equity indexes incorporate relevant information into their prices very quickly, so it is unlikely that you know something the market does not (see Efficient Market Hypothesis).
Equity total returns are influenced by many factors, including: interest rates, valuation metrics, economic sensitivity, inflation, the tax regime...and on and on.
Sure, but so is your insurance fund. Worse, actually, since if you structure your investments wrong you may go flat bankrupt, which would be pretty much impossible if I’m holding indices.
Moreover, tons of research has shown that major equity indexes incorporate relevant information into their prices very quickly, so it is unlikely that you know something the market does not (see Efficient Market Hypothesis).
Yes, but that’s irrelevant. In this scenario, I’m insuring, not investing. I don’t care about average or risk-adjusted returns or stuff like that, I care only that in those states of the world where there is severe technological unemployment likely affecting me, I have assets of value. So the question is, in technological unemployment scenarios (whatever their probability, howsoever they are priced into the efficient market) would my equities be worth more? I think they would.
I’ll expect your call 10 years from now.
I dunno, so far I’m not impressed by your prospectus. :)
Mac, I think you may be underestimating the level of knowledge of the other commenters here. It’s not like we haven’t heard of David Ricardo or of the EMH.
In Ricardo’s example, England and Portugal already exist and will not change significantly. The number of producers is basically constant.
In the human/robot example, given such a huge absolute advantage to the robot, we would just build more robots. That would be vastly more economical than having humans do the things that the bots are much better at, but isn’t their highest aptitude.
At this moment, I think the greatest advantage of humans with low intelligence is that they are relatively flexible, “easy to program”, and come with built-in heuristics for unexpected situations. By which I mean that they can easily walk across your factory or shop; and you don’t have to be a computer programmer to explain them you want them to pick boxes from one place and move them to other places sorting them by color. And in case of fire (which you forgot to mention explicitly during their job training), instead of quietly continuing to move the boxes until everything burns, they would call for help.
Give me reasonably cheap robots with these skills, and I think some people will have no economical comparative advantage left. Getting from there to replacing an average programmer would probably be a shorter distance than getting from zero to there.
I agree with you that automated processes will eventually have an absolute advantage in all areas of productivity. However, humans only need a comparative advantage to be employable. The theory of comparative advantage is a “powerful yet counter-intuitive insight in economics” and I recommend checking it out. Ricardo’s example is especially instructive, link is below.
http://en.wikipedia.org/wiki/Comparative_advantage#Ricardo.27s_Example
Imagine Portugal is a robot, and England is a human.
I am not sure this analogy will work.
As an extreme example, today a computer processor can calculate one addition in 1 nanosecond, and one multiplication also in 1 nanosecond. A human can calculate one addition in 10 seconds, and one multiplication in 100 seconds (multiple-digit integers).
Taking the law of comparative advantages too literally, if I have a computer, I should be able to trade with people, offering to multiply integers for them, if they will add integers for me, for a ratio of e.g. 3 multiplications for 1 addition. They should profit, because instead of spending 100 seconds doing one multiplication, they only need to spend 30 seconds doing three additions for me, and then I will do the multiplication for them. I should profit, because instead of wasting 3 nanoseconds for three additions, I only need to spend 1 nanosecond for one multiplication.
But in real life it wouldn’t work for the obvious reasons (transaction costs being a few magnitudes higher than any possible profit).
This is a silly example mostly proving that even the comparative advantages are not guaranteed to save the day. If the difference between robots and humans becomes too large, the costs of having to deal with humans will outweigh the possible gains from trade.
Upon review of all these comments, I was excited to craft a reply. So I started describing the theoretical reasoning and supporting empirical evidence for the theory of comparative advantage and its labor market interpretation. I also researched historical unemployment rates during periods of great technological progress. After a short while, a much more profitable idea dawned on me. Introducing…
Mac’s Unemployment Nightmare Insurance Policy
Worried that technological advances will leave you jobless? Hedge that risk!
Confident that automation will wreak havoc on the economy? Put your money where your mouth is!
For an annual premium that’s just a fraction of your benefit, Mac promises to pay out when the U.S. unemployment rate exceeds 35%. That’s a whole 10% lower than the worst case scenario in the Quartz video, so what are you waiting for? Call us today! 1-800-MAC-RICH
Hm… why would I buy technological-unemployment insurance? If I’m understanding the theories right, in such a scenario, income/returns to equities should increase markedly. So wouldn’t I be better off taking my premiums and buying stock market indexes? Unlike other scenarios like life insurance (where death could strike at any time and so self-insurance can be a bad idea), everyone seems to agree that there’s not going to be any such spikes within the next, say, 10 years, and that allows for a decent nest-egg to be built up.
Equities are not guaranteed to hedge this risk. Equity total returns are influenced by many factors, including: interest rates, valuation metrics, economic sensitivity, inflation, the tax regime...and on and on. Moreover, tons of research has shown that major equity indexes incorporate relevant information into their prices very quickly, so it is unlikely that you know something the market does not (see Efficient Market Hypothesis).
I’ll expect your call 10 years from now.
Sure, but so is your insurance fund. Worse, actually, since if you structure your investments wrong you may go flat bankrupt, which would be pretty much impossible if I’m holding indices.
Yes, but that’s irrelevant. In this scenario, I’m insuring, not investing. I don’t care about average or risk-adjusted returns or stuff like that, I care only that in those states of the world where there is severe technological unemployment likely affecting me, I have assets of value. So the question is, in technological unemployment scenarios (whatever their probability, howsoever they are priced into the efficient market) would my equities be worth more? I think they would.
I dunno, so far I’m not impressed by your prospectus. :)
Mac, I think you may be underestimating the level of knowledge of the other commenters here. It’s not like we haven’t heard of David Ricardo or of the EMH.
What fraction?
How about for every year from now until either of us dies I give you $1k if the US unemployment is below 35% and you give me $20k otherwise?
That would be a pretty bad deal for you.
Deal! Tell your friends too!
Note to SEC: This isn’t real.
In Ricardo’s example, England and Portugal already exist and will not change significantly. The number of producers is basically constant.
In the human/robot example, given such a huge absolute advantage to the robot, we would just build more robots. That would be vastly more economical than having humans do the things that the bots are much better at, but isn’t their highest aptitude.
The question is not whether we hold a comparative advantage, but whether that advantage will remain large enough to pay for, e.g., food.